Rehabilitation Tax Credit - Real Estate Tax Tips

The rehabilitation credit applies to costs you incur for rehabilitation and reconstruction of certain buildings. Rehabilitation includes renovation, restoration, and reconstruction. It does not include enlargement or new construction.

Generally, the percentage of costs you can take as a credit is:

• 10% for buildings placed in service before 1936
• 20% for certified historic structures

Disaster areas

The credit is temporally increased for property located in specific disaster areas:

• For pre-1936 building (other than certified historic structures) the credit percentage is increased from 10% to 13%.
• For certified historic structures, the credit percentage is increased from 20% to 26%.

GO Zone

The increase applies to property located in disaster areas impacted by Hurricanes Katrina, Rita, and Wilma with respect to qualified rehabilitation expenditures paid or incurred after August 27, 2005 and before January 1, 2012.

Notice 2006-38 provides relief for taxpayers located in these zones. The notice provides that 36 months will be deemed to be a reasonable period to repair and restore qualified rehabilitated buildings without being considered permanently retired from service provided that certain conditions are met. In addition, if the rehabilitated had begun but had not been completed before the President declared a major disaster in the area in which the property is located, the period for the substantial rehabilitation test is tolled for 12 months. For additional information, see Publication 4492, SB Notice 2006-38, and the instructions to Form 3468 (PDF).

Midwestern Disaster Areas

The increase applies to qualified rehabilitation expenditures paid or incurred after the applicable disaster date, and before January 1, 2012 on any building damaged in a Midwestern disaster area as the result of severe storms, tornados, or flooding. For additional information see Publication 4492A and the instructions to Form 3468.

Tax Exempt Use Property

The rehabilitation tax credit is not allowed for expenditures with respect to property that is considered be tax exempt use property. Under the tax-exempt entity leasing rules of 168(h) the threshold to determine if a disqualified lease exists has been raised from more than 35% to more than 50%. The provision is effective for expenditures properly taken into account for periods after December 31, 2007.

Alternative Minimum Tax

Business tax credits generally may not exceed the excess of the taxpayer’s income tax liability over the tentative minimum tax (or, if greater, 25 percent of the regular tax liability in excess of $25,000) Thus, business tax credits cannot offset the alternative minimum tax liability.

For qualified rehabilitation credits determined under Internal Revenue Code Section 47 attributable to qualified rehabilitation expenses properly taken into account for periods after December 31, 2007 the tentative minimum tax is treated as being zero with respect to the rehabilitation tax credit. Thus, a taxpayer may use the rehabilitation tax credit to offset his regular tax liability.

See the instructions on Form 3468, Investment Credit (PDF), for more information.

Facade Easement Market Studies (Dec 2009)

In 2008, the Conservation Easement Issue Management Team commissioned market studies for facade easements in Chicago, New York, and Washington D.C. for the period January 1, 2003 - December 31, 2007. A copy of the market study report prepared for any of the three cities can be obtained by sending an email to sbse.market.studies@irs.gov. In your email, you must indicate the city for which you are requesting a market study and provide your complete name and mailing address.

Due to size, the report will be mailed to you on disk. Multiple copies of the disks cannot be provided due to limited resources.

Place of Filing Notice

If you have claimed a rehabilitation tax credit and the entire project is not completed 30 months after you have claimed the credit and you have not received final certification from the Department of Interior, you must provide written notice to the Internal Revenue Service. The notice must be provided before the last day of the 30 months. The notice as required under Regulation Section 1.48-12(d)(7) is to be mailed to the address shown and you must consent to extend the statute of limitations.

Topical Tax Briefs

Facade Easement Brief August 2009 (PDF)

Late Submission of "HPC Application" (PDF)

Property Leased to a Tax-Exempt Entity (PDF)

Use of the Rehabilitation Tax Credit by Lessees (PDF)

Rehabilitation Tax Credit Recapture (PDF)

Allocations of Tax Credit (PDF)

IRS Connection

Get Frequently Asked Questions (PDF) about the Tax Aspects of Historic Preservation.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.